Solving Debt in Divorce: You Won’t Get These Options in Court

Solving Debt in Divorce: You Won’t Get These Options in Court June 6, 2017 By Julian Schwartz +Leave a Comment marital debt divorceFor couples facing a divorce, it is often a time filled with feelings of sadness over the loss of the marriage relationship and anxieties about the future. These feelings can be further exacerbated when there is substantial marital debt. There are no easy answers for these situations, but in “no court” settlement processes, such as collaborative divorce, couples can often creatively approach the topic of their debts and develop options for resolution that are not usually available in Court.

Judges Are Constrained by the Court In the context of Texas marital property law, community property means that each spouse is a “co-owner” of the assets and debts that have accumulated during the marriage. There are exceptions to this general concept, such as when something qualifies as separate property but, as a general rule, this is the reality that Judges apply to dividing the marital estate. (Sponsored Advertisement) Wise Decisions A Court’s mandate is to divide the community property assets and debts in a manner it deems “just and right.” Judges have discretion to decide what is just and right but their decisions must still fall within a general range.

If a Court awards all debts to one party and none to the other, it could risk an “abuse of discretion” complaint and possible reversal on appeal. The reality is that all too often when there is considerable debt, a Judge may assign a portion to each spouse that will be their responsibility to pay, notwithstanding the financial hardship this could cause.

The bottom line is, Judges have limitations on what they can do and this sometimes leads to resolutions imposed at the courthouse that can be unsatisfactory to both spouses. A Different Approach In collaborative divorce, a couple’s ability to explore creative solutions is not limited by the Court’s authority. Instead, couples can creatively explore options for dealing with their debts that, while still challenging, can be structured in a way that works better for the post-divorce family. A few examples of approaches that could be available through cooperation include:

1. Agreement to divide the assets and debts unevenly.

At first blush, this may seem “unfair” or “ridiculous,” however, in collaborative divorce, couples are often focusing their efforts and energies on goals that go beyond simply the finances. A spouse may agree to take on a greater portion of the marital debt because one or more other non-monetary goals are being achieved as a part of the overall collaborative settlement.

Some of these non-monetary goals may include: a customized schedule for sharing time with the children; a willingness by the other spouse to forego a separate property or reimbursement claim; the agreement of the other spouse to keep an asset or family business intact and functioning that may be deemed advantageous to the spouse taking on the greater debt, or simply one spouse willing to take on additional debt so that the other spouse will have a more viable financial path forward post-divorce.

2. Post-divorce co-ownership of an asset and associated liability for a period of time.

While generally the goal of the divorce property division is to have as few financial “strings” attaching the spouses post-divorce as is possible, in some circumstances, it’s financially to the spouses’ disadvantage to “unlink” themselves at the exact time of the divorce. For example, if a home is at a “depressed value” or even “upside down” due to a poor real estate market, instead of being forced to sell the home at a loss, the couple could choose to co-own the home for a period of time post divorce. By agreement, they could allocate between them responsibility for expenses of use and upkeep and who will have the right to live in the home post-divorce while co-owned. Then, at a later preset or agreed time, the house can be sold when the undesirable market circumstances have improved. Of course, it would be wise to build in certain safety measures to preclude an indefinite co-ownership against one or both spouses’ wishes, but this arrangement could allow a couple who is able to work together cooperatively to diminish their losses or possibly even realize gains that would not otherwise be available to them through a court ordered divorce resolution.

3. A chance to “clear the decks and start fresh.”

In circumstances where there are illiquid marital assets and significant debts, rather than simply apportioning the debts between the spouses, a couple could agree to a controlled sale of assets in order to generate liquidity to extinguish all or a substantial portion of the debt. This approach could considerably simplify each spouse’s post-divorce financial obligations and give them a greater ability to move forward with a “clean slate.” The key, of course, is being able to work together so that the timing and terms of the asset sale maximize the income available to pay off the debt.

The above-discussed creative approaches are simply examples of ways couples working together in the collaborative divorce process can improve upon the difficult circumstances of dealing with substantial marital debt. These types of creative approaches require cooperation and are generally not feasible in the environment of distrust and anger that is often present when couples are battling one another in front of Judges.

Substantial debt, and especially situations where the marital estate has a negative net worth, are always challenging in divorce situations and there are never easy solutions but when a couple can work together with the assistance and guidance of trained, experienced collaborative professionals, they have the best chance of a resolution that will give both former spouses a financially viable path moving forward.